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Annuities: Fool's Gold or Fiscal Smarts? |
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By Joan E. Lisante March 20, 2006
One of those alternatives, the annuity, sounds like a no-lose proposition. After all, the average American male lives to about 80; women, to 84. There are lots of doctors' visits and hopefully a few flights to the Caribbean between now and then -- enough to burn through your savings and more. While they aren't the answer for every prospective retiree, you should know what annuities provide and why they could be a legitimate part of your retirement plans. One size investment never fits all, and the same holds true of annuities. For starters, get familiar with the several types of annuities: 1) Fixed vs. variable annuities With a fixed annuity, your payment amount remains the same each month. Some think of this as creating your own "pension plan" in these days when fewer and fewer companies provide a "traditional" pension. With a variable annuity, the amount you collect each month depends on how the stocks, bonds, or other investments in the underlying portfolio do. It can go up, but be careful: It can also go down. 2) Annuities indexed to inflation If you buy an inflation-indexed annuity, the true value of your monthly payments is less likely to shrink because of the erosion power of inflation. But this protection isn't free: your initial payments under the annuity will be lower, in anticipation of higher inflation-indexed payments years from now. 3) Annuities indexed to stock market performance Known as "equity-indexed annuities," these claim to shield you the investor from stock market losses by going up when share prices rise but not dropping when they fall. If this sounds like a foolproof deal, many investors agree. The Wall Street Journal reports that, in 2004, sales of equity-indexed annuities rose 67%, to $23.4 billion. But to get a handle on your true yield, you must know whether the annuity calculates gains on a "point to point" basis or an "annual reset with monthly averaging" basis. 4) Immediate vs. deferred annuities An immediate annuity starts paying as soon as you buy it (or transfer funds into it.) A deferred annuity, by contrast, includes an "accumulation period" during which you pay premiums before your payments begin. Which you choose will depend on both your age and your financial health when taking out the annuity. Which to Choose, If AnyWhether any of these products is right for you depends on several factors: your age at retirement, whether or not you'll continue to work, your other sources of income and the cost of your lifestyle. But before plunking down any hard-earned dollars, a few warnings are in order:
More Regulation Ahead?Because annuities come in different flavors and can be difficult to understand, a movement for tighter regulation of annuity sales is underway. The National Association of Insurance Commissioners (NAIC) has proposed regulations to see that buyers get the product that's appropriate for their financial needs. The NASD, a private-sector provider of financial regulatory services, recently fined Syosset, New York–based David Lerner Associates $400,000 for violating rules enacted to protect buyers of variable annuities. So it looks like oversight in this market is increasing. But until protections are stronger, be your own financial advisor by observing a few savvy-consumer rules before buying an annuity:
ResourcesBut don't take our word for it. Here some some other resources that will help you make the right decisions. Books
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